The pros and cons of joint ownership in estate planning: simplicity vs. control

Joint ownership is a legal arrangement where two or more individuals own an asset together, such as a bank account, real estate property, or investment account. The most common form of joint ownership is joint tenancy with right of survivorship (JTWROS), where each owner has an equal share of the asset, and upon the death of one owner, their share automatically passes to the surviving owner(s) without the need for probate.

Another form of joint ownership is tenancy in common (TIC), where each owner has a specific percentage of ownership in the asset, and upon their death, their share passes to their designated beneficiaries as outlined in their will or trust, rather than automatically to the other owners.

Joint ownership can simplify estate planning in several ways, making it an attractive option for many individuals. Here are some of the key benefits:

Immediate transfer of assets

One of the most significant advantages of joint ownership is the automatic transfer of assets to the surviving owner(s) upon the death of one owner. This process, known as the right of survivorship, bypasses the often lengthy and costly probate process, allowing for a quicker and more straightforward transfer of property. For example, if a married couple holds their home as joint tenants with right of survivorship, the surviving spouse immediately becomes the sole owner upon the other’s death.

Avoidance of probate

Probate is the legal process of distributing a deceased person's assets according to their will or, in the absence of a will, according to state law. Probate can be a lengthy and expensive process, often taking several months to a year or more to complete. By holding assets in joint ownership, the surviving owner(s) can bypass probate entirely, saving time and money. Joint ownership can help preserve more of the estate’s value for the surviving owner(s) and heirs.

Simplified management

Joint ownership can simplify the management of assets during the owners’ lifetimes. For example, a joint bank account allows any owner to access and manage the funds, which can be particularly useful for married couples or family members managing finances together. This arrangement can make it easier to handle everyday financial transactions and larger decisions, such as selling property.

Potential tax benefits

In some cases, joint ownership can offer tax benefits. For instance, in the United States, spouses who own property as joint tenants with right of survivorship may benefit from a step-up in basis for the property’s value upon the death of one spouse. This can reduce capital gains taxes if the property is later sold by the surviving spouse.

While joint ownership offers several advantages, it also has significant drawbacks that can complicate estate planning. Understanding these potential pitfalls is crucial for making informed decisions about your estate plan.

Loss of control

One of the most significant disadvantages of joint ownership is the potential loss of control over the asset. All joint owners have equal rights to the property, which means decisions about the property must be made collectively. This can lead to conflicts and complications, especially if the owners have differing opinions or interests. For example, if you own a rental property with a sibling as joint tenants, you both must agree on matters such as renting to tenants or selling the property.

Exposure to creditors and lawsuits

Joint ownership can lead to unintended consequences, particularly if one of the owners faces legal or financial troubles. For instance, if a joint owner incurs significant debt or is sued, their share of the jointly owned property may be subject to creditors’ claims. This can jeopardize the entire asset, impacting the other joint owners’ interests. This risk can be mitigated by using other estate planning tools, such as trusts, to protect assets from creditors and lawsuits.

Complications in blended families

Another potential disadvantage of joint ownership is the possibility of unintended beneficiaries. When an asset is held in joint tenancy, it automatically passes to the surviving owner(s) upon the death of one owner, regardless of the deceased owner's wishes as outlined in their will or trust. This can lead to unintended consequences, such as disinheriting other intended beneficiaries or creating conflicts. For example, if you remarry and hold assets as joint tenants with your new spouse, those assets will automatically transfer to your spouse upon your death, potentially disinheriting your children from a previous marriage. This can lead to family disputes and legal challenges, complicating the distribution of your estate.

Difficulty in removing a joint owner

Removing a joint owner from an asset can be challenging and often requires their consent. This can be problematic if relationships change or if one of the owners becomes incapacitated. For example, if you co-own a home with a friend and later want to sell your share, you may face difficulties if your friend is unwilling or unable to buy you out.

Gift tax implication

Adding a joint owner to an asset, such as a bank account or real estate property, can be considered a gift for tax purposes. If the value of the gift exceeds the annual gift tax exclusion amount ($18,000 per recipient in 2024), the giver may need to file a gift tax return and potentially pay gift taxes. This can be especially problematic if the joint owner is not a spouse, as gifts between spouses are typically exempt from gift taxes.

Medicaid eligibility concerns

For seniors who may need long-term care in the future, adding a joint owner to an asset can impact their eligibility for Medicaid. Medicaid is a government program that provides health care coverage for low-income individuals and those with disabilities, including seniors who require nursing home care. When an asset is held in joint ownership, it may be considered a countable resource for Medicaid eligibility purposes, potentially disqualifying the senior from receiving benefits.

Estate taxes are a crucial consideration in estate planning, and joint ownership can significantly impact the tax implications for your estate. Understanding these effects is essential for making informed decisions about your estate plan.

Potential estate tax savings for spouses

For married couples, joint ownership can provide estate tax savings. In the United States, spouses can take advantage of the unlimited marital deduction, which allows them to transfer an unlimited amount of assets to each other without incurring estate taxes. If spouses own property as joint tenants with right of survivorship, the surviving spouse inherits the property without estate tax consequences. This can help preserve more of the estate’s value for the surviving spouse and heirs.

Estate tax implications for non-spouses

For non-spouses, joint ownership can complicate estate tax planning. When a non-spouse joint owner dies, their share of the jointly owned property is included in their estate for tax purposes. This can increase the overall value of the estate, potentially triggering estate taxes. Additionally, if the surviving owner is not a spouse, they may be subject to gift taxes if they receive a share of the property’s value that exceeds the annual gift tax exclusion amount.

Impact on step-up in basis

Joint ownership can affect the step-up in basis for inherited property, which has significant tax implications. When a person dies, the value of their share of the property receives a step-up in basis to its fair market value at the date of death. For married couples, this can provide substantial tax savings if the surviving spouse later sells the property. However, for non-spouses, the basis step-up may only apply to the deceased owner’s share, potentially resulting in higher capital gains taxes when the property is sold.

While joint ownership can offer simplicity and ease in estate planning, it may not always be the best solution for every situation. There are several alternatives to joint ownership that can provide more control, flexibility, and protection for assets and beneficiaries.

Revocable living trusts

A revocable living trust is a legal document that allows an individual (the grantor) to transfer ownership of their assets to a trust during their lifetime. The grantor can serve as the trustee and beneficiary of the trust, maintaining control over the assets while alive. Upon the grantor's death, the assets in the trust are distributed to the designated beneficiaries according to the terms of the trust, bypassing probate.

Payable-on-death (PoD) and transfer-on-death (ToD) designations

PoD and ToD designations allow an individual to name a beneficiary for specific assets, such as bank accounts or investment accounts, without the need for joint ownership. Upon the owner's death, the assets are transferred directly to the designated beneficiary, avoiding probate. This option provides more control over the distribution of assets while still maintaining simplicity.

Beneficiary designations for retirement accounts and life insurance policies

Retirement accounts, such as 401(k)s and IRAs, and life insurance policies allow the owner to name specific beneficiaries to receive the assets upon their death. These designations supersede any instructions in a will or trust, making them an important part of estate planning. Regularly reviewing and updating beneficiary designations ensures that assets are distributed according to the owner's wishes.

Durable power of attorney

A durable power of attorney (PoA) allows you to designate someone to manage your financial affairs if you become incapacitated. This arrangement can provide similar benefits to joint ownership in terms of asset management, but with greater control and flexibility. The designated agent only has authority over your assets if you are unable to manage them yourself, and you can revoke the PoA at any time.

Life insurance

Life insurance can be an effective tool for estate planning, providing a source of funds that bypass probate and go directly to your beneficiaries. Life insurance proceeds are generally not subject to income tax, and they can be used to pay estate taxes, debts and other expenses, preserving more of your estate’s value for your heirs.

Despite its potential drawbacks, joint ownership can still be a useful tool in certain estate planning situations. Some examples include:

• Married couples. For married couples, holding assets in joint ownership can be a simple and effective way to ensure that the surviving spouse has immediate access to funds and property upon the death of one spouse. However, it is still important for married couples to have a comprehensive estate plan in place to address other concerns, such as guardianship of minor children and distribution of assets to other beneficiaries.
• Small estates. For individuals with smaller estates and limited assets, joint ownership can be a cost-effective way to transfer assets to beneficiaries without the need for a more complex estate plan. However, it is important to weigh the potential risks and drawbacks of joint ownership against the benefits of simplicity and probate avoidance.

Evaluate your financial situation

Examine your financial situation and the types of assets you own. Joint ownership can be advantageous for certain assets, such as real estate and bank accounts, but may not be the best choice for all types of property. Consider how joint ownership will impact your overall estate plan and whether it aligns with your long-term financial goals.

Consider your control preferences

Think about how much control you want to maintain over your assets. If retaining control is a priority, alternatives like revocable living trusts or PoD/ToD accounts may be more suitable. Joint ownership can be effective for simplifying asset transfer, but it requires a willingness to share decision-making authority.

Consult with an estate planning professional

Working with an estate planning professional can help you with the complexities of joint ownership and other estate planning strategies. An experienced attorney or financial professional can provide personalized guidance based on your specific circumstances, helping you make informed decisions that align with your goals.

Joint ownership is a common estate planning strategy that offers both simplicity and challenges. While it can streamline the transfer of assets and reduce probate costs, it also comes with potential drawbacks, including loss of control and unintended consequences. Understanding the pros and cons of joint ownership is crucial for making informed decisions about your estate plan. By carefully evaluating your options and considering alternatives, you can create a plan that meets your needs and ensures your assets are distributed according to your wishes.